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Hollinger's auditor testifies at Black trial

Hollinger International's auditor said she was ``surprised&quot; to discover executives had not disclosed non-compete payments received from the sale of Canadian newspapers and pressed them to do so despite objections from one of Conrad Black's co-defendants, the former press baron's fraud trial heard Monday.

By Romina MaurinoCanadian press

Mon., April 23, 2007

CHICAGO – Hollinger International's auditor said she was ``surprised" to discover executives had not disclosed non-compete payments received from the sale of Canadian newspapers and pressed them to do so despite objections from one of Conrad Black's co-defendants, the former press baron's fraud trial heard Monday.

Marilyn Stitt, an accountant with KPMG in Toronto and Hollinger's independent auditor, said she had disagreed with Jack Boultbee, the company's former chief financial officer, when he told her disputed non-compete payments stemming from a deal with CanWest Global Communications (TSX: CGS) in 2000 didn't need to be disclosed.

The payments, she said, were part of a material related-party transaction, and she "was concerned they had not been disclosed in the 2001 financial statements."

"If they were not disclosed, we would have to qualify our audit report," she told him during a 2002 meeting.

The CanWest payments are a key part of the U.S. government's case against Black and other former Hollinger executives. It alleges two of the defendants – Boultbee and Peter Atkinson – inserted themselves into the agreements to disguise bonuses as non-competes to avoid a tax hit.

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Prosecutors have said they will also show Black and his executives covered up fraud at the company by creating a false paper trail.

Defence lawyers say the payments were a legitimate part of the deals and were approved by Hollinger's board of directors and its audit committee.

Stitt said Boultbee told her the company did not consider the CanWest payments fell under the related-party transaction category because Hollinger International "was just acting as an agent" to help distribute the money to individual executives named in the agreements.

But despite his view, Boultbee told Stitt the payments were eventually disclosed – after Hollinger's lawyers told the company the move was required under U.S. Securities and Exchange Commission rules.

Stitt said Boultbee also said there had been no other similar payments in any previous transactions in the U.S., a statement which is also in dispute.

Stitt's testimony also touched on a 2002 meeting between KPMG and Hollinger's audit committee, at which the auditors brought up the U.S. non-competes and asked the independent directors to confirm whether they had in fact approved the payments.

The committee didn't voice any objections, she said, and she ``left that meeting under the full belief that they had been previously approved."

KPMG ended up issuing a "clean" audit for 2001, which meant that outside auditors believed the Hollinger's financial statements were properly stated.

Had there been any questions about whether the non-competes were not actually required by the buyers, as prosecutors argue, KPMG may have found otherwise, she told prosecutor Julie Ruder.

Misinformation "would have called into question management's integrity," she said.

"The audit process basically fails if the representations (from a company's management) are not truthful or complete."

Stitt also explained that an audit is only based on selective testing of financial transactions and is not an "absolute guarantee."

Fraud is especially difficult to detect, she added, because it involves an intentional act to deceive, and it is not something auditors really seek out.

Defence lawyer Michael Schwartz tried to shift responsibility for possible mistakes to KPMG, suggesting Hollinger's audit committee relied on the auditors, which he described as "public watchdogs," whom the public looks to for credibility.

Schwartz also pointed out that various experienced, high-priced accountants had vetted Hollinger's results.

"If you had an issue, you would have told (the audit committee), right," he asked.

Stitt's testimony is expected to set the stage for the prosecution's next witness, Richard Burt, a former Hollinger International board member.

Burt, a former U.S. diplomat who served as the chief negotiator during talks with the former Soviet Union and was a former director and member of Hollinger International's audit committee, is expected to testify the committee was misled about some of the fees.

Prosecutors will argue that the committee approved the payments based on false information provided by Black and the other executives.

Black and two of his three co-defendants – Boultbee and Atkinson – are accused of pocketing US$60 million in payments from companies that bought Hollinger newspapers in the United States in exchange for promises not to compete with the papers in areas where they circulated.

Black's former top executive Radler also was accused of pocketing money, but pleaded guilty in return for a lenient jail sentence of 29 months and an agreement to testify against Black.

Former Hollinger lawyer Mark Kipnis is accused of helping to arrange the transactions.

Black, 62, is also accused of misusing about $20 million in company funds for personal expenses, including a vacation to the South Pacific island Bora Bora.

Hollinger International received a total of $80 million in non-compete agreements from CanWest, out of which Black and Radler received $19.4 million, Ravelston Corp., Black's private holding company, got $38.8 million and Boultbee and Atkinson each received just over $2 million.

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